In our environment it didn't work though. After several hours we spent on trail and error cycles we nailed down our issue which worth sharing.

Our configuration required that the outgoing emails will be sent via SMTP service running on the front end server. To enable the outgoing emails we configured the SMTP server as a relay. This caused the incoming mails to be sent back to the host mail server (which is not Exchange in our case).

Once we figured this out, we made the following change that fixed the issue:

In IIS 6.0, right click SMTP Virtual Server and select Properties.

Navigate to Delivery.

Click on Advanced

Check the 'Attempt direct delivery....' and OK twice.

Now, instead of the SMTP server sending back the incoming emails, it will try first to send them to a SharePoint email address.